Hard Forks:

Changes that do not affect consensus:

Suggestions to add functionality that will effect how the network handles the transactions that are not yet mined into a block.

These transactions are held in a mem-pool while waiting for the first confirmation.

Replace By Fee (RBF) and Child Pays For Parent (CPFP) are examples of this kind.

Miners (including Hashers and Pool-Operators)

Miners are thermodynamically securing the network with Proof of Work (PoW)

They are rewarded with new coins in addition to transaction fees. But high operational costs are forcing the miners to sell off the majority of this reward.

Miners produce blocks that are mathematically linked in a blockchain.

These blocks contain transactions between the bitcoin users.

The blockchain represents the history of all transactions.

Miners are on the supply side in the market, and are therefore putting downward pressure on the price of bitcoin due to inflation.

Pool-Operators construct blocks.

Hashers are paid by Pool-Operators to perform PoW on these blocks.

Hashers can leave or join any pool at any time.

A misbehaving Pool-Operator risk that Hashers will leave the pool.

Let’s say that a miner successfully finds block X:

The miner will be rewarded with newly created coins in addition to fees from all the included transactions.

However, this money does not become spendable until the blockchain have been extended with an additional 100 more blocks that must be built on top of block X.

If other miners don’t agree that block X is a valid block, then they will reject this block by not building on top of it.

But what happens if a majority, let’s say 75% of miners (by hash power) have decided to change the existing consensus rules?

They may now see block X as valid, even if the remaining minority (25%) of miners disagree.

The minority miners (the ones who does not want to change the rules) are only going to build on top of what they see as the “most work *VALID* chain”

A new and otherwise valid block, will also become invalid (in the eyes of this minority) if it is built on top of block X.

This is where the blockchain will split into two different chains / networks.

Difficulty Retargeting is an automatic adjustment of how difficult it should be to find a valid block.

Miners are competing against each other to find valid blocks.

If the value of bitcoin goes up; this will attract more miners and the combined hash-power of the network will be increased. The result of this is a shorter block-generation-time.

If the value of bitcoin goes down; then the opposite will happen, and the block-generation-time will become longer.

The Difficulty Retargeting schedule is 2016 blocks and the adjustment will always target a “block-generation-time” of 10 minutes. This means that an adjustment will normally happen once every two weeks (approximately)

If 75% of the miners have decided to do a hard fork; then they can basically change any rule they want, including the Difficulty Retargeting schedule.

But what happens to the 25% minority of miners that are left with a 2016 block schedule?

Their block-generation-time will be extended to 40 minutes which means that their next retargeting may take as long as 8 weeks (depending on where they are in the 2016-block-schedule)

Confirmations will be slow, but for HODLers this doesn’t really matter. The coin can still serve as a store-of-value if its users still have confidence.

When retargeting finally occurs; the block-generation-time will be returned to 10 minutes.

Wallet Providers

Let’s say that a hard fork leads to a permanent coin-split (similar to ETH/ETC)…

Users will now own coins on both sides of the fork (on both blockchains / both networks)

Users are in need of new software that can handle the two different coins.

Wallet providers decide if they want to develop the needed software.

Wallet providers also decide how they want to display the two different coins in a wallet.

Depending on which coin they like best, they may display a “Primary Coin” and a “Secondary Coin”

This may influence the perception among some users.

Users who fail to upgrade their wallet-software are likely to lose money.

This is because they lack the tools to handle both sides of the fork (both coins)

When spending money; the transactions are likely to be valid on both sides, so the risk is to lose money on the opposite side of the fork.

Node Operators

Nodes are independent validators that checks everything in accordance with the current consensus rules.

When a node considers a block to be valid, it will forward the block to other validators, and the other validators (nodes) will repeat the same behavior.

Nodes can be seen as accountants who are validating the transactions created by users and the blocks constructed by miners.

Node Operators may download new software if they want to support a change of the current rules (a hard fork)

Nodes that do not want support a hard fork; will simply ignore all blocks that do not comply with its current ruleset.

Even if these blocks represents the “most work chain” they will still be ignored (seen as invalid) by all nodes who have not download the software that implements the hard fork.

Users (including HODLers and Traders)

Users give bitcoin its value by;

A) Perceiving it as money, and using it as money.

B) Being willing to exchange their hard earned fiat money for the return of bitcoin.

C) Acting (for the most part) as the “demand side” in the market, and therefore putting upwards pressure on the price of bitcoin.

D) Ultimately decides what the value of bitcoin should be, as a product of how much fiat money they are willing to pay per bitcoin.

E) Having confidence that bitcoin will continue to be a good store-of-value.

What can happen if some other player in the ecosystem start acting against the interest of the users?

Users have the power to strike back at everyone in the ecosystem; simply by losing confidence in bitcoin as money.

Loss of confidence will put downward pressure on the price of bitcoin, and therefore directly harm the profitability of miners.

In the event of a Coin-Split:

Users will now suddenly own 2X the amount of units/coins. An equal amount of coins will be held on each side of the fork.